It has become an all too familiar refrain from central bankers, when inflation falls short of their target, that the explanation is simple. Chairman Powell repeatedly highlighted individual price declines that could prove ‘transitory ‘and dashed expectations that the Fed would cut its policy rate any time soon. Readers will call that his predecessor, Janet Yellin, often referred to price declines as ‘transitory’ or just ‘noisy’ and that we can expect to hit the 2% target in the ‘medium’ term. Both leaders expressed frustration that inflation had fallen short or failed to stay on target when reach, even for just a month or two.

Once again, missing the inflation target is becoming commonplace. Over the past decade, the U.S. headline inflation rate has averaged 1.44% and the core rate averaged 1.56%. We witness a similar situation evolving in the EU, U.K, Canada and, most notably, Japan ----- inflation rates consistently fall below target, despite heroic efforts by the monetary authorities to re-inflate their economies.  During the past decade, there were even periods when deflation was feared. This led the Fed to introduce quantitative easing, a bond-buying program that reached nearly $4 trillion. And, up to very recently, real rates of interest were negative in the US. Europe and Japan continue to support negative nominal rates of interest, let alone deeper negative real rates. In brief, the central bankers have brought out a full range of weapons designed to promote inflation to no avail.

On top of this, the US achieved acceptable rates economic growth and low unemployment side-by-side in a world of virtually no inflation. It is no wonder that policy-makers continue to scratch their heads as to what do next.

Arguing which inflation calculator to use---- such as personal consumption expenditure price deflator (PCE) or the consumer price index (CPI) or whether to include or exclude volatile components such as food and energy---- is beside the point. That debate does not really advance our understanding as to why inflation is flat on its back.

In an earlier blog, this writer argued that it is time to abandon the 2% inflation target.[1] The Fed would not be in its current policy conundrum or straitjacket if it did not explicitly target an inflation number. It would have more flexibility if just considered policy based upon a mix of data involving employment and various measures of output in setting the Fed funds rate. This approach would allow for more flexibility in establishing rates since it did not contain any specific hard inflation number that would dictate a policy change. It seems that with every FOMC meeting observers obsess on the issue of inflation targets. It seems that too much is riding on whether the inflation target is being reached or not. The most recent inflation numbers just provide more evidence to support dropping the inflation target.

[1] Time To Abandon The 2% Inflation Target